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How to make bankers richer: The Brazilian financial market with public and private banks

  • Barros, Alexandre Rands

In this paper, the literature on state-owned banks (SOB) and on the determinants of high spread and profitability of Brazilian banks are briefly reviewed. Then the paper proceeds to present the hypothesis that the way state-owned banks have interacted with public-owned banks in the market is partially responsible for such high profitability and interest rates spreads of Brazilian banking system. A model is presented to explain how this interaction can generate this profitability and spreads. The results also show that governments that stretch social policies are those that are most likely to raise profitability and spreads. Furthermore, the model also shows that if the government is generous with employees of state-owned banks, it will also contribute to the profit performance of private banks and high interest rates spreads. An empirical test for this hypothesis is developed. It tests if the expected profitability of privately owned banks rises when there is a reduction in the expected profits of state-owned banks. The results confirm the major hypothesis.

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Article provided by Elsevier in its journal The Quarterly Review of Economics and Finance.

Volume (Year): 48 (2008)
Issue (Month): 2 (May)
Pages: 217-236

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Handle: RePEc:eee:quaeco:v:48:y:2008:i:2:p:217-236
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620167

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  1. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei, 2001. "Government Ownership of Banks," Working Paper Series rwp01-016, Harvard University, John F. Kennedy School of Government.
  2. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  3. Levine, Ross & Loayza, Norman & Beck, Thorsten, 2000. "Financial intermediation and growth: Causality and causes," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 31-77, August.
  4. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
  5. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2000. "The Role of Social Capital in Financial Development," NBER Working Papers 7563, National Bureau of Economic Research, Inc.
  6. Eduardo Levy Yeyati & Alejandro Micco & Ugo Panizza, 2004. "Should the Government Be in the Banking Business?: The Role of State-Owned and Development Banks," IDB Publications (Working Papers) 6684, Inter-American Development Bank.
  7. Blanchard, Olivier Jean & Kiyotaki, Nobuhiro, 1987. "Monopolistic Competition and the Effects of Aggregate Demand," American Economic Review, American Economic Association, vol. 77(4), pages 647-66, September.
  8. Márcio I. Nakane & Daniela B. Weintraub, 2004. "Bank Privatization and Productivity: Evidence for Brazil," Working Papers Series 90, Central Bank of Brazil, Research Department.
  9. Agnes Belaisch, 2003. "Do Brazilian Banks Compete?," IMF Working Papers 03/113, International Monetary Fund.
  10. Márcio I. Nakane, 2001. "A Test of Competition in Brazilian Banking," Working Papers Series 12, Central Bank of Brazil, Research Department.
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